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Why is India undershooting the target for GDP growth in FY23 ?

- Varnika Mathur

The author is a second year undergraduate student pursuing BA[Economics & Human Resource Management] & a member of the IPCW, Global Youth Chapter.

The Indian economy is on its path to recovery from the adverse economic effects and repercussions of the COVID-19 Pandemic. Despite the losses incurred, several factors have contributed in ensuring that this path is solid, allowing for rapid movement of the economic growth in a positive direction.

In contrast to the low expected GDP growth rate of most of the advanced economies, India had already surpassed the losses and achieved the real GDP growth rate of 8.7% in FY 2021-22, 1.5 times greater than the rate at which the economy grew in FY 2019-20. Several factors contributed towards this and a trend along the same lines is being observed in FY 2022-23. Given the past positive reports of its economic recovery, the initial projection for the Indian GDP growth rate was set at 8.0–8.5%.

Though a well structured road map devised for India's economic growth rate, the inflation rate was controlled greatly, the country strengthened its international trade ties via bilateral agreements and through regional forums for cooperation like SAARC, BRICS and ASEAN. This would boost the next exports (NX) component of the economy, leading to growth in capital expenditure specifically in the private sector, along with encouragement of FDIs by making the process more flexible and favorable for the MNCs, giving a kick-start to the investment component post pandemic. Given these developments, the government was also eager to reduce its revenue expenditure because the money outflow on public welfare and creating safety nets during the pandemic would multiply, implying a drop in the "G" component (government expenditure). The tax collection boosted heavily during this time. Simultaneously, with the gradual recovery of economic activity across the country, it was witnessed that there would be an increase in consumption—the largest driver of aggregate demand in the economy.

Little happened as compared to the predictions made by the government and the World Economic Outlook, which said that India would achieve a growth-rate of nearly 8% during January 2022. There were several challenges in the way of Indian economic growth during the FY 2022-23:

● Consumption demand, the largest contributor to GDP, was already stagnating before the pandemic. Any further deterioration would accelerate the demand problem whose repercussions would be seen in the other components as well. ● Similarly, growth rates of investment demand plunged into the negative zone before the pandemic hit the economy, whose recovery would naturally be a longer process. ● Though government consumer spending for public welfare rose steadily; it was not in a position to make up for the slump in the previous two components. ● Net exports, as a demand driver, will not be able to revive GDP in the short run if all other current global economic environment factors remain largely unchanged, as they appeared to be during the years 2022-23. There may be improvement in those external factors, but it would be wise to not bank too much on that but rather on the subsequent miraculous revival of high export growth. The skyrocketing inflation rates in economies of UK and US were aided by the Russia-Ukraine war which led to higher oil prices, and India being a major oil importer had to suffer greater costs of importing, further dis-balancing the X-M (exports minus imports gives net exports) factor as the value of imports grew while there was no significant increase in the exports. ● In addition, global inflation contributed to hardships in India which saw an overshoot in the inflation rates above the permissible target of 6% set forth by the Reserve Bank of India. A large part of this inflation was attributed to the supply side disruptions[1], which could not be controlled by the RBI reducing the money supply several times by hikes in the rate of interest over the year.

These efforts along with those made in the field of infrastructure and qualitative expenditure have allowed for forecasts to predict that inflation would ease out in the future, and one of the barriers to economic growth will be taken care of.

As per S&P[2], India still had prospects of maintaining an economic growth rate well above 7%, which is still several decimals higher than the actual expected growth rate for FY23[1].

[1] [2] stock market index

One of the major reasons as to why the forecasted rates kept falling was the food inflation, clubbed with a substantial reduction in the NX component owing to the fact that there was no demand for goods in the international markets, while exports fell steeply due to internal economic turbulence within India’s major trading partners, such as the UK, US, and Russia. On the other hand, the trade deficit with China kept expanding. As per the WTO, the trade growth forecast dropped down to 1%, which was yet another all time low, owing its existence to the high inflation rates within countries and their subsequently shrinking demands.

While India was unable to control inflation in other countries unilaterally, it made several efforts to do so domestically. The Reserve Bank of India increased the repo rates, i.e., the rate at which RBI lends money to the commercial banks, twice during the tenure, in an effort to reduce the currency in circulation so that too much money does not chase too few goods, working on the principle ‘high rates hit recoveries’.

Given the encouragement towards self-reliance via various schemes such as Atmanirbhar Bharat or Make in India, the self-sufficiency of the subcontinent has gotten a push, and foreign direct investments have been on the increase due to the creation of better SEZs and various reforms allowing for a more flexible process for setting them up.

With the softening of global commodity prices by the end of the year, the inflation caused due to supply chain disruptions and hike in input prices was eased out and the food inflation was significantly reduced. This helped during Q3[2] and Q4 of FY 2022-2023 in moving towards recovery. Moreover, with the introduction of several farmers’ and production-linked incentives, the agricultural and manufacturing sectors were greatly revamped.

Another challenge was the currency depreciation against the US dollar, which reached a point where 1 USD was worth 81 INR. The moderating global demands resulted in lower exports while imports rose as the economy was on the path to recovery. Global inflation and the US dollar's unprecedented rise were causing India’s import bills to rise while the receipts were unable to keep up with them. There was also a shrinkage of the forex reserves.

[1] FY 2022-23 [2] quarter

Despite the gruesome challenges faced by the Indian economy, it persisted in having a GDP growth rate close to 7%, which was an achievement in itself. Unlike several other major economies, which could not even account for an economic growth rate of 1%, India had an excellent performance while maintaining its goal of reducing its current deficit. Experts have said that though India is required to maintain a growth rate above 7–7.5% for the next 25 years to reach its long-term goals, it is futile to be apprehensive over the fact that it is undershooting its targeted rate, for there are several developed economies that have never touched the growth rate of 6%.

There have been several reforms aimed at amending the structural anomalies of the nation, which is yet another commendable achievement. The country is performing better globally than most advanced economies. The world in its entirety is anticipated to grow at 3.2%, out of which the emerging markets and developing economies have an expected growth rate of 3.7% against 1.1% for the advanced economies. Strong macroeconomic principles and flexible yet effective policies will be instrumental in these trying times when the world proceeds towards recession and India continues to remain insulated from its effects.









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